• COURT DIARY

    Does A Bare Licence Lead To Consumer Deception?

    In a case brought before the House of Lords (Scandecor Developments AB v Scandecor Marketing AB and others), two fundamental issues of UK trade mark law and practice were considered. The first issue concerned the validity of a bare exclusive trade mark licence in modern business practice. A bare licence is one under which the trade mark proprietor has no power to control the quality of the goods sold under the licence. The second issue concerned the own name defence to trade mark infringement under Section 11(2)(a) of the 1994 Act. In particular, does this defence apply to companies or just to individuals?

    The case concerned companies operating in the field of posters, calendars, prints and related products. Originally, a single company, Scandecor International AB, had been created by two Swedish students to sell posters. After the two founders fell out, however, a complex series of agreements and transfers had led to the plaintiff operating in continental Europe and the defendant operating in North America, UK, Ireland and Scandinavia. From 1984 until 1996, the defendant had exclusively distributed the plaintiff's Scandecor posters in their (the defendants) territory and had also developed their own Scandecor calendars and prints for sale in their own area. The plaintiff, however, owned the UK trade mark registrations covering the word Scandecor and the Scandecor Logo.

    Relationships finally broke down irretrievably between the companies in late 1996 and, in early 1997, the defendant announced that it would sell products bearing the Scandecor marks either published by itself or obtained from independent sources. The plaintiff sued for trade mark infringement and passing off, seeking an order that the defendant should stop using Scandecor as either a company name or a trading name.

    The defendant counter-claimed that the two UK trade mark registrations were invalid, under Section 46(1)(d) of the Act, since the plaintiff had allowed the trade marks to become deceptive because, for many years, they (the plaintiff) had not exercised quality control over the goods produced by the defendant and had therefore ceased to be the origin of the goods sold under the Scandecor name in the UK.

    The defendant also contended that since they had independently developed calendars and prints, any UK goodwill and reputation in the sale of these products belonged to them. Finally, they raised an "own name" defence under Section 11(2)(a). Under that Section, a registered trade mark is not infringed by "the use by a person of his own name or address" provided use is "in accordance with honest practices in industrial or commercial matters."

    In the facts, the High Court (Mr Lloyd) decided that the marks had not become deceptive and that the local (UK) goodwill was shared between the plaintiff and defendant companies. He also ruled that the own name defence did apply to company names (including such names with the omission of Ltd) as well as natural persons. On appeal, the trade mark registrations were revoked on the ground that, in consequence of the use made of the registered marks by the proprietor (or with his consent), the marks were liable to mislead the public (Section 46(1)(d)). Scandecor Development appealed to the House of Lords against the decision to revoke their registrations.

    The Court first reviewed the question of licensing trade marks in the UK, both from an historical perspective and under the new (1994) Act. The key issue to be decided in this regard was "whether a grant of a bare exclusive licence by a trade mark proprietor is objectionable as inherently liable to deceive potential customers?". The Court expressed the following views on this question:

    • Under the 1994 Act, a trade mark denotes that goods bearing the mark come from one business source. The business source is the person who is for the time being entitled to use the mark, whether as proprietor or exclusive licensee. Customers are well used to the practice of licensing of trade marks. When they see goods to which a mark has been affixed, they understand that the goods have been produced either by the owner of the mark or by someone else acting with his consent.

    • This interpretation of the Act does not undermine the protection which a trade mark is intended to afford customers. For their quality assurance customers rely on the self interest of the owner. They assume that if a licence has been granted the owner can be expected to have chosen a suitable licensee and imposed suitable terms. They also assume that during the currency of any licence the licensee, as well as the owner, is likely to have an interest in maintaining the value of the brand name. Customers are not to be taken to rely on the protection supposedly afforded by a legal requirement that the proprietor must always retain and exercise an inherently imprecise degree of control over the licensee's activities. Freed from the constraints of previous Trade Mark Acts, UK law can now catch up with business practice.

    Since the above views would represent a significant change in English trade mark law, before applying them in the present case, the House of Lords sought an authoritative ruling from the ECJ on the following question. "Is a trade mark to be regarded as liable to mislead the public within the meaning of Article 12(2)(b) of the EC Harmonisation Directive (from which Section 46(1)(d) of the 1994 Act is derived) if the origin of the goods denoted by the mark is a bare licensee?"

    Turning to the "own name" defence issue, the House of Lords preferred the view that a company, as well as an individual, can claim the protection of the provision. The Court took the view that the "honest practices" proviso ensured that companies would not be able to misuse the limitation that this interpretation would place on the rights of trade mark owners.

    Once again, however, the Court recognised the importance of this matter and before applying their own interpretation, put the following question to the ECJ:

    "Is a company a person for the purpose of Article 6(1)(a) of the Harmonisation Directive"?

     

    Comment

    Even though the licensing of trade marks has become an industry in itself and it appears that the English Court may be on the point of (finally) recognising this fact, it would still be unwise, in the writer's opinion, for a trade mark owner to indulge in uncontrolled licensing of his mark with no effort being made either to control the quality of the goods provided under the licence or to remain in close business contact with the licensee or licensees.

    Even if a bare exclusive licence is found by the ECJ to be acceptable, at least in principle, it could still be argued that such use is not "genuine" use within the meaning of Section 46(1)(a) of the Act and that therefore the registration is vulnerable to revocation on the ground of non-use. Further, where such uncontrolled licensing of the registered mark has taken place, revocation actions based on the deceptive quality of the goods and the deceptive nature of the trade origin of the goods should also be expected until the new legal position on trade mark licensing in the UK is definitively resolved. It is submitted that, whatever the ruling of the ECJ in the Scandecor case, it will still make good business sense for the proprietor to exercise close control over the use of his mark by a licensee.

    Turning to the question of "own name" defence, the House of Lords' comments on the application of this defence to company names are in line with earlier UK case law. Section 11(2)(a) of the 1994 Act is derived from Article 6(1)(a) of the Harmonisation Directive. In the joint statement accompanying that Directive, it is stated that "the Council and the Commission consider that the terms "his own name…apply only in respect of natural persons". A similar statement was adopted in relation to the equivalent Article 12 of the CTM Regulation. These statements could conflict with the English Court's position. Although certain of these statements have already been signally ignored (compare, for example, the joint statement that "the activity of retail trading in goods is not as such a service for which a CTM may be registered" and OHIM's recent decision to begin accepting applications for retail services), it remains to be seen whether the traditional position of the English Court on "own name" defence and its applicability to company names will remain good law once the ECJ has considered the Scandecor case.